In a recent decision, Judge Wood distinguishes Supreme Court precedent to find an arbitration agreement that did not provide for class arbitration invalid under Second Circuit precedent because it foreclosed the exercise of statutory rights. Reaffirming her initial decision, Judge Wood determined defendant's reliance on the intervening decision of AT&T Mobility LLC v. Concepcion ("Concepcion") in seeking reconsideration was misplaced.

In a recent decision, Judge Wood distinguishes Supreme Court precedent to find an arbitration agreement that did not provide for class arbitration invalid under Second Circuit precedent because it foreclosed the exercise of statutory rights. Reaffirming her initial decision, Judge Wood determined defendant's reliance on the intervening decision of AT&T Mobility LLC v. Concepcion ("Concepcion") in seeking reconsideration was misplaced.

Plaintiff Stephanie Sutherland originally filed a putative class and collective action against Ernst & Young ("E&Y") alleging misclassification under the Fair Labor Standards Act ("FLSA") and New York Labor Law ("NYLL") and seeking lost overtime wages.

E&Y subsequently sought to dismiss or stay the proceedings, and to compel arbitration, pursuant to a mandatory arbitration agreement that prohibited class arbitration.

On January 17, 2012, Judge Kimba M. Wood denied E&Y's motion for reconsideration of her previous March 2, 2011 Order denying E&Y's motion.

E&Y argued that reconsideration of Judge Woods' original decision was warranted because of "new evidence" and a change in controlling law under the Second Circuit decision in Italian Colors Restaurant v. American Express Travel Related Services. Co. II ("AmEx II") and Supreme Court decision in AT&T Mobility LLC v. Concepcion ("Concepcion").

Original Decision

In her original decision, relying on the first iteration of the Second Circuit decision in Italian Colors Restaurant v. American Express Travel Related Services. Co.("AmEx I"), Judge Wood reasoned that for the plaintiff to proceed with her overtime claims under FLSA and NYLL on an individual basis she "would be required to spend approximately $200,000 in order to recover double her overtime loss of approximately $1,867.02." In tandem with the fact that whether "attorney's fees and expenses incurred during arbitration [were] compensable [was] subject to the discretion of the arbitrators," the result was:

Enforcement of the class waiver provision in this [mandatory arbitration agreement] would effectively ban all proceedings by [plaintiff] against E&Y. She will be unable to pursue her claims, even if they are meritorious. As a result, E&Y would enjoy de facto immunity from liability for alleged violations of the labor laws.

Specifically, Judge Wood's original decision pointed to the holding in AmEx I that "the enforceability of a particular class waiver provision in an arbitration agreement should be determined by reference to . . . the totality of the facts and circumstances," including but not limited to:

the fairness of the provisions, the cost to an individual plaintiff of vindicating the claim when compared to the plaintiff's potential recovery, the ability to recover attorneys' fees and other costs and thus obtain legal representation to prosecute the underlying claim, the practical [e]ffect the waiver will have on a company's ability to engage in unchecked market behavior, and related public policy concerns.

Judge Wood also distinguished the Supreme Court decision of Stolt-Nielsen S.A. v. AnimalFeeds International Corp., finding that it pertrained only to contract construction, as opposed to the question of the enforceability of an arbitration agreement at issue here.

E&Y subsequently tried again by way of a motion for reconsideration after AmEx II and Concepcion.

Second Decision

New Evidence

E&Y first argued that representations by plaintiff's counsel in seeking discovery after Judge Wood's original order served to demonstrate that, contrary to the original decision, the plaintiff could vindicate her rights outside the class context. Indeed, plaintiff's counsel had suggested that moving forward with discovery prior to class certification was appropriate.

In rejecting this argument, Judge Wood reasoned that plaintiff's counsel was only "advocating for the beginning of at least limited discovery and expressing ways in which this discovery could be relevant if class certification was denied," and that "statements . . . regarding hypotheticals d[id] not alter the facts before th[e] Court sufficiently to warrant reconsideration."

Nonetheless, E&Y's arguments serve as a cautionary note to counsel challenging mandatory arbitration agreements to be consistent in their arguments when seeking discovery.

Changes in Controlling Law

E&Y's second argument was that decisions from the Second Circuit and Supreme Court required reconsideration of Judge Wood's decision.

E&Y first pointed to AmEx II as requiring reconsideration of Judge Wood's original opinion. Judge Wood rejected this argument, noting that AmEx II served to reaffirm the factors (discussed above) found relevant to the potential invalidity of an effective class action waiver described by the Second Circuit in Am Ex I, and relied upon by Judge Wood in her initial decision.

Judge Wood then addressed the Supreme Court decision in Concepcion and noted several distinctions between Concepcion and the case before her.

First, Judge Wood held that, unlike Concepcion, the facts before her involved an arbitration agreement that, for all practical purposes, foreclosed Plaintiff's exercise of her statutory rights.

Pointing to the Supreme Court's reliance in Concepcion on the district court's finding that the specific arbitration agreement at issue there was actually more favorable to the plaintiffs than would be available in a class action, Judge Wood held that Concepcion did not apply to an instance where the arbitration agreement's provisions, instead, served to effectively prohibit the pursuit of statutory rights.

Judge Wood determined the arbitration agreement before her effectively prohibited the exercise of statutory rights:

The terms of the arbitration agreement at issue in Concepcion ensured that the Concepcions could bring their claim in arbitration on an individual basis, either representing themselves or with counsel. The fact that a plaintiff in the same situation as the Concepcions might choose not to make a claim for such a small overcharge is not the Court's concern, even if a class-action lawyer might be eager to bring the case on behalf of all similarly situated plaintiffs, but for the class-action waiver. By contrast, the terms of the arbitration agreement and the cost of discovery in [plaintiff]'s case preclude her from redressing alleged FLSA violations.

Second, Judge Wood rejected E&Y's suggestion that her original decision would hold all class action bans invalid, and therefore, result in an effective arbitration ban without limits. She found that such limits were clearly articulated by the Second Circuit, in Am Ex I and Am Ex II, which respectively stated and reaffirmed the factors relevant to the permissibility of a class action waiver.

Third, Judge Wood further distinguished Concepcion, finding it singularly applicable to a state court's interpretation of the state common law of contracts, but not, as in the case before her, to a federal court's interpretation of a federal statute, in this case "the FAA itself:"

[T]he Savings Clause of the FAA specifically provided for exceptions to the use of arbitration agreements" upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2 . . .[t]he effect of [which] is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act.

Judge Wood therefore reasoned "the rule the Second Circuit articulated in AmEx I and II, . . . arises from the FAA itself and the federal common law of arbitrability and is consistent with the FAA." In addition, she observed that the case before her was "similar . . . to situations discussed by the Supreme Court in which it has stated that it may not enforce contractual agreements that would operate 'as a prospective waiver of a party's right to pursue statutory remedies,'" including Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc and Green Tree Fin. Corp.-Alabama v. Randolph.

In summary, Judge Wood's decision lays out several arguments for plaintiffs seeking to challenge particularly onerous and cost prohibitive mandatory arbitration agreements that do not provide for class arbitration.

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